Imperfect mobility of labor across sectors and fiscal transmission

Olivier Cardi, Romain Restout, Peter Claeys

Research output: Contribution to journalArticlepeer-review

6 Citations (Scopus)

Abstract

Our paper investigates the sectoral effects of government spending shocks and highlights the role of labor mobility. Our VAR evidence for sixteen OECD countries reveals that a shock to government consumption by 1% of GDP increases non-traded value added by 0.7% of GDP and generates a decline in traded value added. The value added share of non-tradables rises by 0.35% of GDP, thus implying that the reallocation of resources accounts for 50% of the sectoral fiscal multiplier. Consistently, our estimates show that the non-traded sector is highly intensive in the government spending shock and experiences a labor inflow. The shift of hours worked toward the non-traded sector is, however, subject to mobility costs which vary across countries. When we explore quantitatively the sectoral effects of a shock to government consumption that is highly intensive in non-traded goods, we find that the model can replicate the magnitude of the rise in the share of non-tradables we document empirically once we allow for both labor mobility and capital installation costs. Financial openness also matters as it further biases the demand shock toward non-tradables. To account for the cross-country dispersion in the responses of sectoral shares we estimate empirically, we have to let the degree of labor mobility vary across countries.

Original languageEnglish
Article number103815
JournalJournal of Economic Dynamics and Control
Volume111
DOIs
Publication statusPublished - Feb 2020

Bibliographical note

Funding Information:
We are grateful to Agustin Benetrix for sharing RATS codes and to Luisito Bertinelli who provided invaluable help at different stages of the paper. We thank Benjamin Born, Falko Juessen, Gernot Müller for providing us with the dataset they constructed containing forecasts for government spending and Laura González Cabanillas for the dataset covering time series for the budget balance-GDP ratio forecast. We are grateful to Francisco Alvarez-Cuadrado, Christophe Hurlin, Stefan Schubert, Stephen Turnovsky, two anonymous referees, and the editors for very helpful comments. We have also benefited from suggestions by participants at seminars and conferences. Obviously, any remaining shortcomings are our own. Cardi thanks the Centre Region for research support (Mutmonde project). Restout thanks the Region of Lorraine for research support (Grant AAP-009-020).

Publisher Copyright:
© 2019 Elsevier B.V.

Copyright:
Copyright 2019 Elsevier B.V., All rights reserved.

Keywords

  • Fiscal policy
  • Labor mobility
  • Investment
  • Current account
  • Non-tradables
  • Sectoral wages

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